Mexico Puts the Heat on Tax Cheats

It has been a wretched year for Carlos Peralta, a swaggering young cellular-phone tycoon who is reportedly one of Mexico’s richest men.

First, he was caught up in the nation’s biggest corruption scandal, with the revelation that he had funneled millions of dollars to the brother of former President Carlos Salinas de Gortari. That led to his ouster as vice chairman of his company, Grupo Iusacell.

But perhaps the worst news came in a phone call to his Mexico City home one recent Sunday morning:

Peralta had been indicted for tax fraud.

The 44-year-old businessman seemed incredulous. He’d simply made a few million dollars’ worth of mistakes on his tax form--”the kind of errors we all make,” he explained later to reporters. And he had quickly paid the $6 million he owed. But he now faces a possible jail term. And “his days of hobnobbing with the top circles of power in Mexico are definitely over,” crowed the Mexico City daily Reforma.

Peralta’s indictment--coming just weeks before Mexicans, like Americans, face their annual tax deadline--symbolizes a dramatic change in Latin America.

From Mexico to Peru to Argentina, governments are attacking a tax-dodge mentality that dates to Spanish colonial days and costs tens of billions of dollars a year in lost revenues.

If evasion was once dismissed as a “national sport,” it’s now attacked with missionary zeal.

“We don’t have a zest for persecuting people,” insists Tomas Ruiz, Mexico’s top tax collector. “The idea is simply that the taxpayer knows we have the means to check up on him.”

For years, Latin American governments were among the world’s worst tax collectors. Part of the problem was hyperinflation, which made tax revenue shrink like courage in a dentist’s office.

In addition, the tax base was tiny. The poor majority of the population earned too little to contribute. And the wealthy minority could feel secure from scrutiny. Their political clout was reflected in slap-on-the-wrist tax laws, which often ranked evasion as a misdemeanor. Rich folks rarely went to prison over taxes.

“You will find very few Leona Helmsleys” in Latin America, noted one World Bank official.

But that is changing. With free trade, governments can no longer fill their coffers with fat tariffs on imported goods. They can’t hike business taxes without scaring away foreign investors.

And the freewheeling borrowing of the past--which produced a decade-long debt crisis--is anathema to the U.S.-educated budget-balancers who have replaced political appointees in many countries.

“You are beginning to have much more economic responsibility [in Latin America]. People understand much better how the economy functions,” said Vito Tanzi, director of fiscal affairs at the Washington-based International Monetary Fund.

The result: tax campaigns that can make the IRS look coy.

Latin governments are jailing sports idols and businesspeople, sending a powerful message that they won’t tolerate evasion. In Argentina, authorities have shuttered more than 100 businesses this year, targeting everyone from tax-dodging bakers to poodle groomers.

“While I’m in this job, people who evade will go to jail,” the country’s tough new tax collector, Carlos Alberto Silvani, declared in February, shortly after the government recruited him from the IMF.

Peru has dispatched troops to shut down markets of tax-cheating contraband salespeople. Today, shoppers in Lima’s malls stroll by signs appealing, “Amigo taxpayer, please ask for a receipt.” The idea: to pressure stores to collect the sales tax.

Mexico has ordered one of the toughest crackdowns. As in most Latin countries, its tax warriors several years ago launched a radical legal overhaul. To increase fairness and efficiency, they slashed the individual income tax rate and eliminated the three-tequila lunch and scores of other exemptions. They also began to jail evaders.

The campaign quickly yielded results. From 1987 to 1994, tax collection jumped from 8.6% to 12.8% of national economic output--an increase of more than $30 billion. Dozens of tax dodgers have been arrested. But changing cultural attitudes takes time. Last year, authorities were shocked to see that collection of the all-important value-added tax had slumped by 30%. Part of the problem was a severe recession; but even more important, authorities realized, strapped business owners were keeping sales taxes as a sort of slush fund to pay bills. By year’s end, unpaid sales tax had soared to more than $5 billion--equal to the budget of the Education Ministry.

Authorities fear that if people believe the government isn’t taking action against tax evaders, collections could plunge further.

“Everyone is watching how the game is played,” said Mario Aguilar, a senior Mexican tax official.

Last summer, authorities decided to play hardball.

They launched a barrage of TV and newspaper ads threatening tax cheats with prison. Squads of police were dispatched to arrest evaders. In one recent case, police swooped down on a soccer executive, Nicandro Ortiz, as he drove through the central city of Morelia. The stunned suspect was hauled off to jail--where he promptly collapsed with heart pains. He faces up to five years in jail if convicted.

In a blaze of publicity, authorities have indicted prominent Mexicans, including a newspaper publisher, a businessman famed as the “King of Parking Garages,” even a sports idol--boxer Julio Cesar Chavez.

Since the crackdown began last summer, the collection of tax revenues has risen about 7%, officials say. And they are determined to boost that figure. They’re gearing up to do 20% more audits this year and recently stiffened jail penalties for evaders who falsify documents.

More than half of Mexicans are so poor that they don’t owe any income tax. Businesses, which contribute most of the country’s taxes, are the main focus of the crackdown.

Targets of the aggressive campaign, however, aren’t taking it quietly.

Business executives, politicians and others charge the government is turning into a calculator-wielding Big Brother. The campaign, they protest, is “tax terrorism.”

“There is an atmosphere of persecution,” complained Alejandro Rojas Diaz Duran, an independent congressman. “This hardly creates a climate of confidence for investment and development.”

They point with alarm to measures such as a letter that Mexican authorities sent to travel agencies last fall, asking them to report on clients who had made foreign trips in the previous two years.

Treasury Minister Guillermo Ortiz Martinez said authorities were simply after offenders who, for example, fly to Paris first-class three times a year, but barely pay taxes.

“Such scenarios do not fit together,” he said in a radio interview.

But, faced with an outcry, authorities recently suspended the program.

“The government wants to go after the movements of its citizens with a shotgun,” complained Rojas, the congressman. “This attitude is a bit sick.”

Many Mexicans also complain that the government’s ads treat citizens like delinquents. Rojas recently persuaded one-quarter of his colleagues to sign a statement denouncing the TV ads, which have been softened in recent weeks.

For the first time, taxes are even emerging as an election issue. And politicians here are learning what politicians elsewhere already know: that railing against the tax collector is a no-lose campaign strategy.

The ruling-party candidate for the powerful Mexico City mayoralty, Alfredo del Mazo, faced a hail of tax complaints during a recent visit with business leaders at an industrial park.

“The tax authorities are getting more rigid, they are bombarding us with their oppressive publicity, and they’re charging enormous fines and interest when we don’t pay some tax,” fumed Pedro Salcedo, head of a major industrialists group. The tax terrorism, he told the candidate, “couldn’t be worse.”

For a tax terrorist, Ruiz doesn’t seem so bad. The undersecretary of Mexico’s Treasury Ministry is a 34-year-old Columbia University graduate with a round, serene face. He arrives at an interview wearing a no-nonsense blue suit and a tie with little orange Indians. There is a rumor that he grew his thick beard to look older; he denies it.

“It’s to look more evil,” he jokes.

Ruiz is unrepentant about the tax campaign. In the past, he said, Mexican businesses had a kind of bargain with the government. The businesspeople supported the long-ruling Institutional Revolutionary Party; in exchange, they could negotiate their way out of taxes, or at least, penalties.

But that bargain is over. Now, Mexico is trying to build a modern, democratic state.

“This complaint of ‘tax terrorism’ . . . is part of a cultural problem,” Ruiz said. “We don’t yet fully accept in Mexico the importance of adequately paying taxes.”

It’s not easy to convince people of this civic obligation. Taxes have rarely been associated with democracy in Latin America. There’s been no Boston Tea Party here, no victorious fight that tied taxation to representation. That’s even reflected in the Spanish word for taxes: impuestos--literally, things that are imposed.

“The history of taxes, for Mexicans, is a history that stems from their destruction as a civilization, and their conquest” by the Spaniards, said Lorenzo Meyer, a noted historian. “Taxes were associated with the extraction of wealth from a defeated people.”

But the problem is more extensive. For decades, unscrupulous Latin American politicians have helped themselves to the public till. Citizens stuck with potholed roads, crumbling schools and soaring crime don’t see their tax pesos at work.

Meyer notes that the Mexican government’s ads threatening evaders often run next to newspaper articles that detail alleged multimillion-dollar corruption under former President Salinas.

“It’s schizophrenic,” he said. “Given that the corruption is so huge, and most taxes don’t go where they should, people think, ‘What’s so bad about not paying?’ ”

It’s precisely that kind of attitude that makes such a tough tax campaign necessary, according to Ruiz. In Mexico, a grand total of two evaders were jailed in the first 67 years after the income tax was established in 1921. Citizens, he said, must learn those days are over.

“The whole point is for people to realize their taxes can be audited, that it will be difficult for them to hide something from us. Because we have access to their bank accounts, to their purchases, to their trips.”

As for complaints about corruption, Ruiz says they are often a “pretext” to avoid paying.

“One thing is to discuss problems of corruption. I think this is important, and you have to attack it. . . . But to go from there to saying, ‘Since these people are corrupt, I won’t pay my taxes’--this is wrong.”

Economists at the World Bank and IMF consider tax reform to be one of the most important achievements of the economic liberalization programs that have transformed Latin America in recent years. Still, there is a long way to go until governments are seen as credible on taxes.

In some countries, citizens complain that officials are still hesitant to go after the rich. In Mexico, many believe that authorities continue to use audits as a weapon against critics or those who have fallen out of government favor.

Such suspicions have emerged notably in the high-profile case of Juan Francisco Ealy Ortiz, publisher of the Mexico City daily El Universal. He was charged with tax fraud last fall--after he reversed the newspaper’s pro-government line. Ealy claims he’s a victim of political persecution.

Officials deny that charge. But, acknowledging concerns about political manipulation, the Mexican government plans to remove tax operations from the Treasury Ministry this summer.

The idea is to create a new institution staffed by professional bureaucrats that will ostensibly be efficient, fair and independent of political pressure. An institution, officials say, that represents the best of democracy.

An IRS?

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Taxes in Mexico

Mexico is cracking down on tax evaders, especially businesses. More than half its people are too poor to owe income tax. The main taxes Mexicans are supposed to pay, accounting for three-fourths of the nation’s tax revenues:

* Individual income tax: maximum 35%

* Business income tax: 34%

* Value-added tax, similar to sales tax: 15%

Source: Mexico’s Treasury Ministry